Life Bureau Filing Guidance Note

Guidance Date: 03/13/2009

Guidance
for Guaranteed Paid-up Deferred Annuities

This guidance is applicable to guaranteed paid-up deferred
annuity contracts subject to §4223 of the Insurance Law. For this guidance, a
guaranteed paid-up deferred annuity is an annuity in which each contribution purchases
guaranteed income determined at the time of contribution to commence at a stated
date. Guaranteed paid-up deferred annuities do not credit additional amounts (excess
interest) and are not expected to pay dividends.

Subsection §4223(a) requires
annuity contracts subject to §4223 to contain in substance the provisions of §4223
or corresponding provisions that in the opinion of the superintendent are at least
as favorable to the contract holder. In addition, for any annuity contract subject
to §4223, §44.6(a) of Regulation 127 requires the annuity contract to have cash
surrender values available, unless the contract meets one of the listed exemptions.
Pursuant to §44.6(a)(6) of Regulation 127, the superintendent may approve annuity
contracts subject to §4223 without cash surrender benefits upon a demonstration
that cash surrender benefits are not appropriate.

Guaranteed
paid-up deferred annuities may require approval under the authority granted to
the superintendent in §4223(a) and §44.6(a)(6) of Regulation 127 for features
such as:

Limited or no death benefit; for the purpose of this
guidance death benefit excludes amounts payable as a result of the annuity form
income option selected (e.g., certain payments);

No cash values;

No specification of interest rate or mortality table as specified in §4223(a)(1)(C);

A provision for annuity benefits other than as specified in §4223(a)(1)(E);

No explicit account value or actual accumulation amount as specified
in §4223(c); or

No specification of an interest rate or mortality
table as specified in §4223(d).

The Circular
Letter 6 (2004) process may not be used for contracts with such features when
the superintendent must exercise discretion pursuant to §4223(a) or §44.6(a)(6).
The submission letter for such contracts should indicate compliance with this
guidance and may ask for priority consideration.

A
form submission requiring approval based on the authority granted to the superintendent
under §4223(a) or §44.6(a)(6) should comply with the following items as applicable:

The cover page of the contract contains a statement to the effect that the
contract (or certificate) does not provide cash surrender benefits prior to the
commencement of annuity payments. See §4223(h).

The cover page
of the contract contains a statement to the effect that the contract (or certificate)
does not provide death benefits prior to the commencement of annuity payments.
See §4223(h).

For contracts with a death benefit and without an
explicit accumulation amount, the cover page must describe how the death benefit
is calculated.

The contract must have provisions at least as
favorable as the provisions required by §4223(a)(1)(C). Section 4223(a)(1)(C)
requires a statement of the mortality table, if any, interest rate and sufficient
information to determine the amounts and times of any minimum guaranteed paid-up,
cash surrender or death benefits.

For a single premium contract where
the amount of benefits are fully defined in the contract, the inclusion of the
mortality table, if any, and interest rate is not required because the Department
considers the inclusion of the actual benefits to be at least as favorable as
the ability to calculate the benefits.

For Flexible Premium contracts the contract must provide:

contact information for the contract
holder to quickly obtain information on current purchase rates and the benefits
purchased to date (e.g. a telephone number and web address); and

a report no less frequently than annually which will state
the amount of benefits purchased with the premiums received since the last report,
including death benefits, the total amount of benefits purchased to date and the
scheduled commencement date(s) of income benefits.

The contract
must have provisions as determined by the superintendent that are at least as
favorable as the provisions required by §4223(a)(1)(E) and §4223(d).
For single premium contracts, the Department considers the use of competitive
purchase rates based on current market conditions at the time of purchase for
fully guaranteed benefits to be as least as favorable as the requirements of §4223(a)(1)(E)
and §4223(d).

For flexible premium contracts, the Department considers
the following to be as least as favorable as the requirements of §4223(a)(1)(E)
and §4223(d):

The contract must include purchase rates guaranteed for the life of the contract using a full table of purchase rate guarantees or by providing a mortality table, interest rate and any additional information from which the purchase rate guarantees can be derived; and

The contract must provide that at the time of premium payment the amount of income benefits purchased will not be less than the greater of the amount that could be purchased by applying the premium payment to the purchase rate guarantees in the contract and the amount that could be purchased by applying the premium payment under any guaranteed paid-up deferred annuity contract offered by the company at the time to the same class of annuitants.

The
application and contract must describe any discretion retained by the insurer
to limit the frequency or dollar amount of premium. A contract where the insurer
retains the discretion to limit premium must provide a statement to the effect
that the right to limit premium would not be exercised in an unfairly discriminatory
manner.

If the contract allows a change in the annuitization
start date, annuity income option or annuitant, the contract must describe how
such change will affect contract benefits and the contract must state any explicit
charge for the change. The contract must include a description of the method and
factors used to determine the income resulting from the change. The contract must
provide that the contractholder can request replacement ratios to evaluate specific
changes being considered. The replacement ratio is defined in item 9. The contract
must also provide that the replacement ratio will be provided to the contract
holder for any change made.

If the contract has any commutation
or surrender provision, the contract must provide a detailed description of such
provision. The contract must include a description of the method and factors used
to determine the commutation or surrender value. The contract must provide that
the contractholder can request replacement ratios to help evaluate commutation
or surrender values. The replacement ratio is defined in item 9.

The
replacement ratio is (a)/(b) where (a) and (b) are defined as follows:

a.
The present value of benefits as applicable after the change; and
b. The present
value of benefits before the change.

Present values are calculated on
the basis of either (i) the current mortality and interest pricing assumptions
that would be used to price a guaranteed paid-up deferred annuity with the same
income payments and annuitant as the income payments and annuitant for which the
present valued is being determined, or (ii) a current interest rate under a readily
available public index and, if applicable, a mortality table provided that the
index and mortality table with projection if applicable are reasonable and disclosed
in the contract. If current pricing assumptions are used and not available, then
the present value shall be calculated on the basis of the interest and mortality
assumptions used to price any annuity for which the company is determining competitive
rates and for which the mortality is available over the appropriate time frame.

A contract subject to items 7 or 8 must describe the replacement
ratio with words to the effect that, "The replacement ratio is the value of benefits
after they are changed as a percent of their value before they were changed."

The submission must be accompanied by an actuarial memorandum which is signed and dated and addresses the following, as applicable:

A
description of the benefits in the contract.

A statement explaining
why the annuity benefits purchased with each consideration will be at least as
favorable as the annuity benefits required by §4223 including §4223(a)(1)(E) and
§4223(d).

If no cash surrender benefit or death benefit is provided,
the actuarial memorandum must explain why the omission of such benefit or benefits
is appropriate. See the requirements to omit cash values in §44.6(a)(6) of Regulation
127.

If the contract has a commutation feature, surrender option,
or allows a change in the income start date, annuity option, or annuitant, the
actuarial memorandum must explain how such provisions are fair (provide reasonable
values) and limit anti-selection risk.

An application or a special disclosure document to be signed and dated by the
applicant must provide statements, as applicable, to the effect that:

I understand the start date for income payments cannot be changed after
issue;

I understand the restrictions in the changes to the start date
for income payments;

I understand the annuity option cannot be changed
after issue;

I understand the restrictions in the changes in the
annuity option;

I understand the annuity has no death benefit;

I understand how the death benefit is calculated;

I understand
the policy has no cash value, loan value or surrender value;

I understand
the annuity income payments are guaranteed at purchase and will neither increase
nor decrease in response to changes in interest rates or inflation. [If the income
does increase / decrease by the terms of the contract then the increase or decrease
should be stated as well as how such increase and decrease varies with interest
rates or inflation].

Please note that this
guidance is not meant to be all inclusive of the requirements for a guaranteed
paid-up deferred annuity. Other concerns may be raised on a case by case basis
during the review of the policy forms. In particular, this guidance does not address
issues of premium default, nonforfeiture and risks for a product in which stipulated
premiums determine a guaranteed paid-up benefit at issue.